Canaccord to investors: Buy the oil sands producers

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at mfawcett@albertaventure.com

Mar 5, 2014

by Max Fawcett

As BNN’s Jameson Berkow reported in his morning note today, Canaccord Genuity’s managing director of North American research thinks now is the perfect time for investors to buy (or buy more) shares of oil sands producers. Why? First, Enbridge’s announcement that it intends to add 370,000 bpd to its Line 3 pipeline that runs from Edmonton to Wisconsin by replacing the existing 34-inch diameter pipeline with 36-inch pipe. The work is expected to be completed by 2017. “Crucially, according to Skolnick, the line previously shipped only light crude but the expanded version will be ‘more than 50 per cent’ geared towards heavier varieties,” Berkow writes, “which supports Skolnick’s longstanding thesis that TransCanada’s Keystone XL pipeline is of ever-shrinking importance to Canada’s oil patch.”

Second, the $4 billion upgrade of BP’s Whiting refinery in Indiana, which was finished in February, will allow it to process as much as 331,000 barrels per day of heavy crude – it’s currently handling 160,000 – by summer. And third, as Berkow writes, Suncor’s latest regulatory filing reveals that it’s building not one but two rail offloading facilities near its Montreal refinery. Combined, those two facilities should be able to handle 60,000 barrels per day.

All told, it’s good news for upstream producers. Combine these developments with the bump that their cash flows will get from the discounted Canadian dollar, and the spreads between WTI and WCS – which are currently at $24 per barrel – could be on their way towards narrowing substantially in future quarterly earnings reports. Canaccord’s favourite ways to play this are Canadian Natural Resources (TSE:CNQ), MEG Energy (TSE:MEG), Baytex Energy (TSE:BTE), Crew Energy (TSE:CR) and Twin Butte Energy (TSE:TBE).

Meanwhile, for those looking for a shorter-term trade, Jeff Evans, CIBC World Markets’ executive director of quantitative strategy thinks that gas-oriented plays could be a good bet. He highlights Enerplus (TSE:ERF), Keyera (TSE:KEY) and Parkland Fuels (TSE:PKI) as his second, third and fifth best names, respectively, based on their leverage to gas prices that are higher than many forecasts are using. That could produce some nice earnings surprises to the upside. And as BNN noted, “Evans’ research shows the benefits of an earnings surprise can persist for six to nine months after results are released. He says that makes the metric ideal for traders who typically hold stocks for less than one year.”